A key aspect of Canada’s new hostile takeover regime will be tested next week as the largest shareholder of Optiva Inc. will appear before the Ontario Securities Commission in an attempt to gain control of the Mississauga-based software company in the face of opposition from rival shareholders.
The hearing, scheduled for next Friday, is expected to generate considerable interest among Bay Street lawyers and merger-and-acquisition advisers looking to see how flexible regulators are with a new set of hostile bid rules introduced in 2016.
Tech investment firm ESW Capital LLC, which owns 28 per cent of TSX-listed Optiva, has been fighting the software company’s second- and third-largest shareholders for control since January.
Late last month, it moved to secure an upper hand over its rivals, Toronto-based Maple Rock Capital Partners Inc. and EdgePoint Investment Group Inc., by offering to buy all the Optiva shares it does not own. Optiva sells software to telecommunications companies.
“ESW’s offer will have a simple goal: to allow any and all shareholders who wish to walk away from this infighting to sell their shares at a premium value,” ESW said in a July news release.
For the offer to proceed, however, the Texas-based investment firm needs to convince the OSC to waive an important minority shareholder rule: More than half of a target company’s shares, not owned by the bidder, need to be tendered for sale before a bid can proceed.
Both Maple Rock and EdgePoint rejected ESW’s unsolicited offer. And because the two firms together own roughly 40 per cent of Optiva – more than half the shares not owned by ESW – they have the ability to block ESW’s effort to woo other shareholders.
The rule was introduced in 2016 as part of an overhaul of Canada’s hostile takeover regime and intended to give target companies more power to defend against unwanted suitors and to give minority shareholders more say in a takeover situation. The virtual OSC hearing next Friday will be the first time the flexibility of the rule has been tested.
ESW’s lawyers, from the firm Aird & Berlis LLP, argue in an application to the OSC that the 50-per-cent rule “was never intended as a tool for entrenchment by an insider block.”
Yet, in practice, the lawyers write, the rule has become a “tool for two of Optiva’s principal shareholders to entrench their de facto control of Optiva and to block the fundamental right of Optiva’s independent shareholders (who exercise control or direction over approximately 31.74 per cent of Optiva’s shares) to choose whether or not to tender to the ESW bid.”
This argument was rejected by Walied Soliman, chair of Norton Rose Fulbright Canada LLP, who is acting on behalf of Maple Rock in the dispute.
“ESW’s attempt at rewriting takeover bid policy, which has been debated for almost a decade, is an ill-advised misuse of commission resources and time. We are disappointed by ESW’s continued spurious actions against Optiva, which have no foundation in law, policy or even equity,” Mr. Soliman said in an e-mailed statement.
The hearing will be watched closely by lawyers at other firms, who see it as a barometer for how willing the OSC will be to grant exemptions to the new rules.
“In a world where we haven’t had much M&A litigation of late, I think this will be of great interest,” said Patricia Olasker, a partner with Davies Ward Phillips & Vineberg LLP, which is not involved in the hearing.
The OSC decision will not be precedent-setting, Ms. Olasker said, “because every fact set will be different.” But if the OSC does grant ESW an exemption, “it would certainly tell you that it’s worth a shot [applying for an exemption], if that’s what’s getting in the way of your deal,” she said.
The situation at Optiva remains in flux ahead of the hearing. The company is holding a meeting on Tuesday, where shareholders will be asked to vote on whether to accept a “shareholder rights plan.” The plan, which Optiva’s board has recommended to shareholders, is a kind of takeover defence often referred to as a poison pill, which has the potential to dilute shareholders but also make it harder for ESW’s takeover bid to succeed.
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Mark Rendell